Where Next For Lonmin Plc?

Lonmin (LSE: LMI) shares have fallen persistently in recent years, prompting a ‘from bad to worse’ turn in the group’s financial position, as pressures from continuous workforce strikes and weakening precious metals prices continued to mount.

The darkening operating environment and deteriorating outlook for investors has now culminated in November’s rights issue, which has expanded the number of shares in issue 45x over, with the sale price of the new shares coming in at a 94% discount to the pre-offer share price.

Effectively, pre-existing investors have now been diluted out of almost all existence, while it remains unclear just what the future will look like for those who either still hold a meaningful position, or for those who have been tempted by the rights price.

As a result, many will probably be wondering: where next for Lonmin?

Bulls say…

Those with a positive view of the shares (there are still some!) seem to be split between those who advocate just holding on and those who advocate buying even more of the shares.

The rationale for both decisions seems to be pretty much the same in both camps. The rights issue has now taken place, the group has ‘adequate’ capital to continue to operate, while it has already written down the value of its assets considerably — implying that it would be unlikely to do so again.

Doubtless, at just over a penny each, the shares have provided some individuals with a cheap trading opportunity in recent days — and could still provide further opportunity in the coming months.

Bears say…

As a natural pessimist, the bear case for Lonmin seems clear to me. This is that the future of the group will depend entirely upon the direction of platinum prices, Lonmin’s ability to contain or to reduce costs, as well as its ability to increase production in order to offset the impact of a low precious metals price environment.

In regards to platinum prices, it is discouraging to note that with the Fed probably just weeks away from announcing a rate hike, the hedge fund community appears to be queuing up to get short on gold once again. This does not bode well for the direction of other precious metals prices.

In terms of costs, it is also discouraging to note that Lonmin’s $740-odd cost of production is slated by management to remain flat out till 2018, while the current platinum price of $840 per ounce appears vulnerable to further weakness in the months ahead.

This pretty much neuters the net assets or book value argument of the bull side, because if the market price for platinum falls sustainable below the per ounce cost of production, then much of the group’s asset base will become all but worthless.  

Last but by no means least, management at Lonmin anticipate that annual production will fall by around 100,000 ounces over the coming years, which leaves little scope for higher sales to offset the effects of a low or falling price environment.

Counting down…

In short, and to sum up, the rational investor inside me is already counting down the weeks until Lonmin announces another rights issue, as there aren’t very many arguments on the bull side that actually stand up to scrutiny.

However, with the shares still valued at little more than a penny each even after double-digit (post-rights) gains, the speculator in me is tempted to dip a toe into the water with a relatively insignificant amount.

On balance, if there is an investment case for Lonmin, I sure can’t see it. However, it seems that an opportunity for pure speculation has presented itself, and those who are yet to take the plunge could still be rewarded yet.